Genting Singapore - DBS Research 2018-05-11: Don’t Miss The Chance

GENTING SINGAPORE PLC SGX: G13

Genting Singapore - Don’t Miss The Chance

Genting Singapore (GENS) 1Q18 adjusted EBITDA up 27% y-o-y to S$359m slightly ahead of expectations.
Strong growth in VIP rolling chip volumes (c.34% y-o-y) with VIP win rate hitting the “lucky” level at 3.2%.
Hold adjusted EBITDA still up a healthy 17% y-o-y.
Upside risk to our estimates if strong volume growth is sustained.

We maintain our BUY call on Genting Singapore (GENS) with a Target Price of S$1.49.
GENS’ share price corrected by over 10% the past 3 months due to concerns post the 4Q17 results that adjusted EBITDA margins would be under pressure.
We believe these concerns were overplayed given the dip in margins was largely due to payment of staff bonuses, and margins in 1Q18 have since rebounded to c.54%, the highest level in over 11 quarters from 44% in 4Q17. Thus, at current share price, GENS offers outstanding value for exposure to a growing VIP business and a duopoly market.

Consensus’s Target Price implies an EV/EVITDA multiple that is below GENS’ average multiple of c.12x. We believe GENS deserves to trade at its average EV/EBITDA multiple given a sustained earnings recovery outlook.
Furthermore, the reasons why GENS traded below its average multiple, namely elevated bad debts and falling earnings, are no longer present.

Despite the recent turnaround in profitability, some investors remain sceptical over the sustainability of GENS’ earnings recovery.
We believe as we progress throughout 2018, as GENS selectively extends credit to its VIP customers which should translate to higher y-o-y increase in earnings, this scepticism should subside, resulting in a further re-rating of GENS’ share price.

Decline in VIP and mass businesses. The key risk to our positive view is a slower-than-expected recovery or decline in GENS’ VIP and mass divisions.

The upturn in earnings since 3Q16 continued into 1Q18 with adjusted EBITDA and normalised profit (excluding exceptional items) up 27% and 64% y-o-y to S$358m and S$239m respectively which was slightly above expectations. While 1Q usually benefits from the seasonal boost from the Chinese New Year period, 1Q18 adjusted EBITDA represented c.29% of our FY18 forecast.
The increase in profitability was attributed to c.34% y-o-y increase in VIP rolling chip in SGD terms or c.45% y-o-y to US$7.1bn. This is faster than the 10% y-o-y growth we have pencilled in USD terms. We also understand GENS’ market share in VIP rolling chip volumes now stands at c.49%, an improvement from the high 30% to low 40% level over the past couple of years.
The 1Q18 results were also boosted higher than average VIP win of 3.2% (2.95% in 1Q17). On a hold adjusted basis assuming 2.85% theoretical win rate, adjusted EBITDA would have come in at c.S$326m which would have still risen a healthy 17% y-o-y.
The mass business (non-rolling and slots) also showed an improvement with gross gaming revenue increasing by c.7% y-o-y in SGD terms.
Owing to the fixed cost leverage, adjusted EBITDA margins came in c.53% compared to 48% achieved in 1Q17 and whole of FY17.
Although bad debts ticked up to S$9.1m from S$4.7m in 4Q17, it remains low and contained down from S$15.0m in 1Q17 and S$50-90m level during FY15-16.

GENS remains in a strong financial position with net cash of c.S$3.0bn (c.S$4.1bn of cash and restricted cash less gross debt of S$1.1bn), up marginally from S$2.7bn at end 4Q17.

GENS guided it continues to be in active discussions with the Singapore authorities about the potential redevelopment of its Resorts World Sentosa (RWS) property. However, it was unable to provide any updates at this point in time.
On Japan, the Integrated Resort (IR) implementation bill has been endorsed and provides a regulatory framework for Integrated Resorts in Japan. These include proposed 30% tax rate on gross gaming revenue and JPY6,000 entry levy for locals. We understand GENS is in active dialog with potential partners, local cities and suppliers for a potential bid after the bill has been passed which the market is speculating will be sometime this year.

For the remainder of 2018, we understand that GENS will seek to grow its VIP and premium mass business and will selectively expand credit.
Year to date, the improvement in business has been broad based and a key growth has been the addition of new customers. We expect this trend to continue.
Furthermore, we believe there remains upside to our earnings forecasts should the strong y-o-y in VIP rolling chip volumes is sustained over the course of the year.

Mervin SONG CFA DBS Vickers | https://www.dbsvickers.com/ 2018-05-11

SGX Stock Analyst Report BUY Maintain BUY 1.490 Same 1.490